Gold prices suffered the largest two day drop in thirty years this month, and the entire market has been trying to find out why, and figure out where the price of the metal is going in the future. A new report, from Macquarie Equities Research, points to an interesting driver of gold prices, and asserts that the price will get worse before it gets better.

gold prices

India, a country of more than 1 billion people, isn’t an easy place to govern. With so many people, and a relatively weak economy until recent years, tax efficiency in the sub-continent is nowhere near what it is in the developed world. Indian tax efficiency is a major driver of world gold prices and the analyst, Rakesh Arora, explains why.

Despite having a population of $1.2 billion, and a GDP of almost $2 trillion, only 42,800 Indians declare an income of more than $200,000 per year. That number clearly contains some discrepancies, and they may be responsible for at least some of the surge in demand for gold in the last decade. As we’ve seen before, emerging market demand is responsible for much of the strength of the international gold market in the 21st century.

India’s wealthy have been using real estate and gold investment in order to hide their income from tax officials. The Indian government has promised to change this situation and punish tax evaders. A statement from the country’s finance minister, which was quoted in the report, reads “You cannot hide any longer, we have far too much information.”

India’s wealthy will have a tougher time hiding their money in gold investments from now on. This trend, along with a related trend in China, should have been anticipated by the market. As institutions developed in Western economies, tax efficiency went up and it became much more difficult to dodge revenue officials. As India’s government becomes more centralized and powerful, its wealthy will have to be more creative and gold is not a particularly sophisticated tax haven.

India’s government is set on reducing the amount of tax evasion in its growing economy, and that means less and less investment in gold among the country’s elite. Macquarie estimates that the country’s parallel, or “black,” economy is worth an estimated $2 trillion. That’s a lot of missed revenue for the government, and a lot of gold demand for the world economy.

Indians are currently sitting on an estimated 20kt of gold, worth an estimated $900 billion. Indian’s, however, pay a wealth tax, calculated at 1 percent of outstanding wealth, which came in at under $200 million in 2012. That figure doesn’t include real estate or other assets in India.

With the trend, which is sure to be reflected in China in the coming years, demand for gold in India is likely to fall. As tax efficiency increases, investors will suffer a 1 percent drag on the appreciation of wealth, hampering its attractiveness as an investment. That means gold is in for a fall, how much is what’s really in question.

The authors of the Macquarie report think that gold will find support at a price of $1200 per ounce. That means that investors around the world, particularly big gold advocates like John Paulson and David Einhorn, have a lot to lose. A price of $1200 puts gold around its marginal production point, a point that is considered “fair value” for a good designed for consumption, and one that implies little investment potential.

Whether gold really does fall $1200, or whether it finds support at a higher price, it appears that changing tax policy and economic trends in emerging economies are putting an end to the day in which gold is a performing asset. Investors will have to wait until trends in those economies change to see a turnaround in the price of the asset.

Because so much gold is held rather than consumed, a perceived drop in expected price leads to more gold on the market, and, like with many more assets, a self fulfilling price prophecy. The underlying value of gold is in its level of supply and demand, rather than any “inherent value” promised by the promoters of the metal as an investment.

Demand for gold is now decreasing, and India’s elites will be responsible for a sustained drop in the demand for gold in the coming months and years if the efforts of the countries revenue service are successful. The same trend is likely to occur in China in the coming years, making the price of gold increasingly susceptible to falls in international demand.

Gold is unlikely to perform as an asset in the coming years, according to this report. There is some promise of a rebound, or a cushion to losses, in increased demand for lower priced jewellery, but with an economic crisis brewing in China, that sector may soon suffer setbacks as well.